Explaining Short Sales / Part 2: From the Buyer's Perspective

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If a buyer has enough patience, they just might find their dream home through a Short Sale. Back in 2006, right when the market was turning, we were looking for a new home for ourselves. Being our own worst clients, it took several months to find the perfect home listed at a great price. A Short Sale listing. We offered full price and the seller accepted. We waited several months for the bank's approval. In the meantime, the home was decreasing in value but since we really wanted the house, we kept waiting. The bank finally said they'd approve it, but wouldn't pay any commissions, and there was no way the seller would pay it. We were devastated, as we had budgeted that money for improvements and repairs. It wasn't going to close! Luckily, the seller's agent found a way to negotiate for funds the bank had set aside for lien payoffs or buyer concessions for which we weren't asking. It was a close one, but with patience and luck we got our dream home (at a slightly higher price than what was then current market value).

Although a Short Sale may present an opportunity to buy a seller-owned home at a fair price, not every buyer is a good candidate for a Short Sale. A Short Sale may be a good choice for a buyer who:

  • has TIME. A Short Sale may take MONTHS to well over a year to close.
  • is ready to pay a fair market price. The price that it is listed for may not be fair market price or approved by the bank! The bank may outright reject low offers or demand more money to approve the sale. The buyer's agent can help the buyer determine what fair market price is.
  • does not ask for any offer contingencies such as on the selling of their own home. The bank will more likely accept a "clean", fair offer.
  • has patience. The bank may not agree to the sale. Many Short Sales never close.
  • should really, really, want that house! The contract may stipulate that the earnest money will not be refundable for a certain amount of time. The buyer probably should not be shopping around or placing contracts on other homes while their contract is under negotiations with the bank as it is not fair to the seller. In addition, the home may decline in value while the home is in escrow.
  • should not be surprised if the home is not in the same condition at close as when they wrote the offer or did an early inspection. The seller often stays living in the home so there may be wear and tear, and also will likely not have the money or motivation to do any repairs. In addition, especially if the home is vacated, there is a chance that appliances or fixtures get stolen. If the inspection is done after bank approval, there may be material defects exposed that the seller and bank refuse to pay for, and the buyer must be prepared to pay for it or walk away.
  • has an experienced agent that knows the Short Sale process. Even though they may not be negotiating directly with the bank, they should be able to help the buyer identify listings from the beginning that are less likely to successfully close in a Short Sale transaction or that have several offers being negotiated with the bank on the same listing.
  • is prepared to contribute some or all of their agent's compensation. The compensation offered by the seller and/or agreed to by the bank may be less than the agent will work for, as banks want as much money at close as possible and the seller may not be willing or able to pay.
  • is prepared for the interest rate to change while they are waiting. The buyer should definitely be pre-approved (or re-approved if need be) before placing any offers, or have proof of sufficient funds if paying cash.
  • is prepared for the bank to approve the sale only on conditions that may not be agreeable to the seller, such as bringing money for the deficiency or signing a note to pay a portion of it. Any other lien holders will also have to approve the sale and will also want their share.

Once I was surprised when a prospective buyer told me they only wanted to see Short Sale Listings. I think they had the incorrect impression that they would get a better home, for less money, in a shorter time, than a traditional sale or R.E.O. (bank-owned home). In reality, many buyers probably should not even be looking at Short Sale listings, although for the right buyers, there may be the opportunity to obtain their dream home through a Short Sale.

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